Window of opportunity for Middle East investors

Middle Eastern investors are continuing to purchase U.S. real estate, and 2013 is set to provide some of the best market conditions in two decades. The U.S. is slowly emerging from one of the biggest real estate market corrections since the Great Depression which presents a window of opportunity for investors looking to capitalise on real estate and take advantage of the large volume of acquisition opportunities.

Prices are still at historical lows – significantly below replacement cost – and renewed growth in select U.S. markets will continue before prices rebound as the cycle shifts. Concurrently, the improving fundamentals of the U.S. banking sector and the commercial mortgage-backed securities market has improved liquidity and transaction velocity for stabilized properties.

Over the past year, Middle Eastern investors have been among the most active international real estate buyers in the U.S. Industry reports indicate that they were the leading foreign investors in U.S. real estate between March 2011 and March 2012, increasing their asset acquisitions by 2.5 per cent. This trend is projected to continue as the European market remains troubled, and the U.S. market continues to display attractive prices amidst the nation’s economic recovery.

In order to seize these opportunities, investors must rely on a combination of timing, targeting the right asset classes and moving into the right markets. For example, among income-producing real estate asset classes, hotels experienced the most impact on their value and therefore, have the most room for recovery. Hotel sector values are projected by HVS* to increase 18 percent in 2013, and to continue rising in subsequent years.

Investors in U.S. real estate have generally focused on a few key “gateway” cities; however, Ethika’s strategy is to expand beyond the largest coastal markets and target hospitality and office assets in top 30 metropolitan areas, which have populations greater than 2 million, exhibit diverse economies, strong employment growth, and high barriers to entry.

These markets have the greatest potential for capital appreciation and current returns given that the tightening of the credit markets during the recession disproportionately impacted these areas.

Over the past 12 months, building confidence in the U.S. debt capital markets, aided by quantitative easing measures undertaken by the Federal Reserve, has led to resurgence in commercial real estate lending. As a result, capitalization rates have dropped precipitously in locations where compression had been slower to occur when compared to the gateway cities.

Markets including San Diego, Pittsburgh, San Antonio and Salt Lake City are seeing significant growth in transaction volume as financial institutions take a more aggressive posture in lowering interest rate spreads and increasing leverage levels to boost loan production.

Real estate firms which have the knowledge and capability to rapidly reposition distressed assets in these markets through renovation and operational improvements will have the opportunity to sell to an expanding buyer pool aggressively seeking stabilized, income-producing properties, and can earn outstanding risk-adjusted returns for their investors.

Andres Szita is co-founder and chairman of Ethika Investments, a real estate private equity firm that has relationships with various types of investors, including many from the Middle East. He can be reached at 310.954.2009 or [email protected].

*HVS is the world’s leading consulting and services organization focused on the hotel, restaurant, shared ownership, gaming and leisure industries.